AQR Capital Management’s Style Premium Fund One Year Later

Last November AQR Capital Management launched a new fund – QSPIX. This fund seeks to capture four specific style premiums while maintaining a stock market neutral position. Last year I wrote two articles about this fund. You can find those HERE and HERE. We started using this fund in the portfolios we build for our clients at Grand Street Wealth Management, LLC shortly after the fund launched (AQR had been using a similar strategy for years at their various hedge funds). As explained in the previous articles, QSPIX met our high bar as a strategy having a solid academic foundation and should survive real world costs. It has been one year since the mutual fund version of this strategy launched, so it is a good time to check up on how it has done.

Here is a chart of the performance of QSPIX, the ETF VT (which tracks the global stock market) and the ETF BND (which tracks the total US bond market). All returns assume the reinvesting of dividends and ignore taxes.

Over the last year QSPIX has had a return of 11.21%, VT had a return of 8.45% and BND had a return of 4.19%. Just by looking at the chart you can see the three lines are moving in different ways. Note the good relative performance of QSPIX during the most recent sell off which started in September. This highlights its stock market neutrality. The small spike down you see in QSPIX in mid-October took place while the stock market was recovering.

Of course getting high returns is not the main purpose of QSPIX. In fact, I estimate the expected return to be around 7% per year, which is lower than typical expected returns of the stock market (VT) of around 10%. As discussed in previous articles, the main reason for adding QSPIX to a portfolio is to diversify by adding another source of uncorrelated returns separate from that of stocks and bonds.

Below is a chart of two portfolios. The one called 33/33/33 is a portfolio consisting of equal parts of QSPIX, VT and BND. The one called Basic 50/50 consists of equal parts VT and BND.

Not surprisingly the portfolio which included QSPIX had a better total return due to QSPIX’s relative performance – a return of 7.95%. The Basic 50/50 portfolio returned 6.32%. Again, increasing total return is not the main purpose of adding QSPIX to a portfolio. Below are some statistics for both portfolios using VT as the benchmark.

We can see some interesting things here. First let’s look at QSPIX individually. Over the last year it had a beta of only 0.11 and a correlation of only 0.15 compared to VT. This is about what we would expect, since it is supposed to be stock market neutral. There is also a large dividend yield of 3.87%, which was actually a mix of dividends, long-term capital gains and short-term capital gains. This highlights that QSPIX is pretty tax inefficient and should be placed in a tax deferred account (401K, IRA, etc). If we look at BND individually we can see that it was also a good diversifier of stocks with a beta of 0.0 and a correlation of 0.0. Surprising to most, bond yield mostly fell over the last year making bonds a decent investment. While not shown above the correlation between QSPIX and BND was -0.34. QSPIX is definitely deriving its returns form a separate source other than stocks and bonds.

If we look at the portfolios as a whole we can see that the beta of the 33/33/33 portfolio was only 0.38 with a standard deviation of 4.18%. This is lower than the 50/50 portfolio with a beta of 0.51 and standard deviation of 4.92%. The R-Squared number really tells the whole story. The basic 50/50 portfolio had an R-Squared of 0.94. This means that the return of VT (the benchmark) explains 94% of the return of the portfolio. Basically the returns come from stocks and the bonds dampen the volatility; this is the case with most average portfolios. The 33/33/33 portfolio’s R-Squared is much lower at 0.72 which means only 72% of the returns can be explained by VT.

We should take these results with a grain of salt, however, as one year of returns does not really tell us all that much about the future of QSPIX. Without a doubt, it will go through years of underperformance and even negative returns, just like any risky investment. QSPIX’s first year looks very promising – having the ability to show strong positive returns while remaining uncorrelated to traditional investments such as stocks and bonds.

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Grand Street Wealth Management is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herin.